Another record high close for the Dow Industrials. Stocks moved lower
today after the Federal Reserve announced it was raising interest
rates. The move was completely expected, so maybe the markets were
reacting to weak retail sales data instead. Stocks recovered from
session lows, with the Dow turning positive in the final hour of trade.

The Federal Reserve raised its benchmark lending rate by a quarter
percentage point to a target range of 1.00 percent to 1.25 percent. This
was the second rate hike in the past 3 months. The hike was widely
expected.

In its statement following a two-day meeting, the Fed’s
policy-setting committee indicated the economy had been expanding
moderately, the labor market continued to strengthen and a recent
softening in inflation was transitory. This was in-line with
expectations for one more rate hike from the Fed for 2017, possibly in
September or December.

The Fed has now raised rates four times as part
of a normalization of monetary policy that began in December 2015. The
Fed’s decision to raise rates was approved 8-1, with Neel Kashkari, head
of the Fed’s Minneapolis regional bank, dissenting in favor of holding
rates unchanged. Kashkari sees a very different economy from his
colleagues, in terms of both inflation and the labor market.

While Yellen
and the members who voted for hikes did so, in part, because they were
worried about rising inflation, Kashkari doesn’t share their concern. If
Kashkari is right, it means the Fed may be leaving lots of jobs and
growth on the table.

The Fed also gave a first clear outline on its plan to reduce its
$4.5 trillion portfolio of Treasury bonds and mortgage-backed
securities, most of which were purchased in the wake of the 2008
financial crisis and recession. The Fed will allow its bond holdings to
mature and fall off the balance sheet without being replaced or rolled
over.

The Fed said the initial cap for Treasuries would be set at $6
billion per month initially and increase by $6 billion increments every
three months over a 12-month period until it reached $30 billion per
month in reductions to its holdings. For agency debt and mortgage-backed
securities, the cap will be $4 billion per month initially, increasing
by $4 billion at quarterly intervals over a year until it reached $20
billion per month.

Back of napkin math means the Fed will try to shrink
the balance sheet in half over about 4 years, once the process starts.
No date given. Fed Chair Janet Yellen said the process could begin
“relatively soon.”

It won’t take long until you start to feel the rate hike. Look for interest rates on credit cards
to jump relatively soon, probably 60 days, or two billing cycles. The
average household now pays a total of $1,292 in credit card interest per
year, according to NerdWallet’s research. Now that the Federal Reserve
increased its rates as analysts expected, the total will rise to $1,309.

On the flip side, savers can look forward to earning higher rates on
deposits, but don’t expect much, bank deposits are paying just over 1% which is not enough to keep pace with inflation.

The Fed also issued updated economic forecasts. The Fed’s revised
forecasts reduced its estimate for unemployment by year’s end to 4.3
percent from a March projection of 4.5 percent. Unemployment has already
reached a 16-year low of 4.3 percent.

The Fed kept forecast for
economic growth this year of 2.2 percent, up slightly from its March
forecast, with growth of 2.1 percent in 2018 and 1.9 percent in 2019. In
a news conference, Fed Chair Janet Yellen said she still expects
inflation to hit a 2% target next year, mentioning that recent declines
are coming from such areas as telecom.

Earlier in the session we had
some disappointing readings on inflation and retail sales.

Higher interest rates are normally good for a currency, but the
dollar’s performance suggest traders see little chance for any more
increases this year – at least if the turmoil in Washington
distracts the Trump administration from implementing its pro-growth
fiscal agenda.

Meanwhile, Treasuries rallied, pushing the yield on the
10-year note down 7 basis points and further flattening the yield curve,
an indication that debt traders are cutting their expectations for
growth. Bond traders are clearly worried the Fed is on a path to harm
the nation’s prospects for growth without meaningfully adding to its
arsenal of tools to deal with any downturn.

Meanwhile in the oil market, the price of crude is doing its best to
keep inflation under wraps. Oil fell below $45 a barrel to its lowest since November as
government data showed that weaker demand at the start of the summer
driving season led to another increase in gasoline stockpiles.

Gasoline
inventories rose 2.1 million barrels last week, according to the Energy
Information Administration. Adding to the market pessimism, the
International Energy Agency said new production from OPEC’s rivals will
be more than enough to meet growth in demand next year, overwhelming the
oil group’s efforts to reduce supplies by cutting its own output.

The
EIA forecasts output at major American shale fields will reach
a record in July.

Consumer prices
declined in May, reflecting a big drop in energy prices. The Consumer
Price Index, or CPI, edged down 0.1 percent last month following a small
0.2 percent increase in April. Prices had fallen 0.3 percent in March.

In addition to a drop in energy costs last month, the price of clothing,
airline fares and medical care also declined. Core inflation, which
excludes energy and food, rose a slight 0.1 percent in May. Over the
past 12 months, consumer prices are up 1.9 percent while core inflation
has risen 1.7 percent.

In May, food costs edged up a tiny 0.2 percent
while energy costs fell 2.7 percent, led by a 6.2 percent drop in the
price of gasoline. Over the past 12 months, food costs are up just 0.9
percent while energy prices have risen 5.4 percent.

Clothing costs
dropped 0.8 percent in May while the cost of new cars and used cars both
fell 0.2 percent. Medical services such as the cost of doctor’s visits
dipped 0.1 percent in May but have risen 2.5 percent over the past 12
months.

Those low food costs might not last. Wheat
has quietly staged a huge rally, as a prolonged dry spell has left the
U.S. spring crop in its worst shape in almost three decades.
Forty-five percent of the crop, the high-protein variety grown in
northern states, was in good or excellent condition as of June 11.That’s down 10 percentage points from the prior week and marks the worst
rating for the time of year since 1988.

Futures have surged more than
15 percent in the past month. Spring wheat futures for July delivery
reached $6.45 3/4 a bushel, the highest for a most-active contract since
December 2014.

The Commerce Department said retail sales
dropped 0.3 percent, the first decline since February and the sharpest
since a 1 percent decrease in January 2016. Last month, sales fell 2.8
percent at electronics stores, the biggest such drop since March 2016.
They fell 2.4 percent at gasoline stations and 1 percent at department
stores, which have struggled with competition from online retailers.

Business inventories
fell by a seasonally adjusted 0.2 percent in April, following a gain of
0.2 percent in March. It was the first decline since a 0.2 percent drop
in October. Sales were flat after contracting 0.1 percent in March.
When businesses increase stockpiles, it is generally seen as a sign of
their confidence that sales will increase in the coming months. A
decrease in inventories can be a sign of pessimism about future sales.

Disclaimer: The material appearing on this site is based on data and information from sources we believe to be accurate and reliable. However, the material is not guaranteed as to accuracy nor does it purport to be complete. Opinions and projections, both our own and those of others, reflect views as of dates indicated and are subject to change without notice. The contributions and opinions of others do not necessarily reflect the views of Marvin Clark, Monsoon Wealth Management, or Fixed Income Daily. Nothing appearing on this site should be considered a recommendation to buy or to sell any security or related financial instrument. Investors should discuss any investment with their personal investment counsel. Past performance does not guarantee future results.